VAs: So Versatile, Owners Often Forget Why They Bought One

Many Americans think retirement is not a realistic option, surveys show.

Here’s a surprising fact about variable annuities: More than one-third of households with an VA aren’t sure why they bought them in the first place.

More than likely this is less a sign of product confusion or amnesia than it is an indication of the variety of uses for which advisors recommend VAs, said Scott Smith, director of advice relationship with Cerulli Associates.

Cerulli’s 2017 survey found that among 925 households who bought a VA:

34 percent weren’t sure why they bought it.

26 percent said it was to guarantee monthly payments in retirement.

20 percent bought it for portfolio diversification.

16 percent purchased it for account growth.

16 percent wanted the tax deferral on earnings.

12 percent were looking to protect assets by insuring a minimum value of payments.

Other reasons included the product’s past performance, setting aside assets for heirs and exchanging an older annuity for a newer one.

How Advisors Position VAs

It’s not all that surprising that so many people are forgetful when it comes to VAs, Smith said.

For one, buyers want to outsource the responsibility for their financial future to an advisor so as not to have to worry any longer.

“They don’t have confidence in taking over accumulation and distribution for themselves and have turned over their trust to them,” he said.

Or they may have bought the product years ago and don’t remember the details of the conversation with their advisor, he said.

But what’s even more interesting is the multitude of uses for VAs and that underscores how advisors position them within their practices, Smith said.

Unlike simple bank checking and savings accounts used almost exclusively for liquidity, VAs can be used to augment 401(k)s or IRAs, for example. Other advisors prefer them for their guaranteed income features, tax deferral and estate planning.

Whereas once VAs were bought primarily for their income guarantees, particularly in the wake of the 2008 financial collapse, advisors now find that VAs can fit snugly into a broader retirement portfolio, Smith said.

Advisors should approach VAs as part of an arsenal to better serve investors’ goals within a fiduciary framework, the report said.

Flow And Ebb Of Demand

“Right after the crisis in 2008 and 2009, people were so worried about the economy that it made sense to pay extra for the guarantees,” said Kerri L. Kimball, an advisor with Apogee Wealth Advisors in New York City.

But a decade removed from the crisis, “You've got to be able to show significant value if you sell a VA,” she said.

“Years ago, people were not worried about 1 percent in extra fees that went with the VA, but now days it's a more fee-conscious, different environment,” she said.

Kimball hasn’t used VAs in about 10 years – but that doesn’t mean she won’t use them again, or in a different way than she has in the past.